United States
What happens to my 401(k) or IRA when I die?
It goes to whoever is named on the account. The beneficiary form is the instruction, it sits outside your will, and an out-of-date one is the most common way American retirement money reaches the wrong person. What the beneficiary can then do with it changed sharply in recent years: most people who inherit now have to empty the account by the end of the tenth year after the death. A short list of eligible designated beneficiaries, a surviving spouse among them, are treated more generously.
The form beats the will
An American retirement account carries its own instruction. The IRS defines the beneficiary as "generally any person or entity the account owner chooses to receive the benefits of a retirement account or an IRA after they die", and that choice is recorded on the account itself.
It does not pass through your estate, and your will does not redirect it. A will written last year does not override a beneficiary form signed in 2009 and forgotten about.
Which makes the stale form the characteristic American failure here: an ex-spouse, a parent who has since died, a blank line. None of those are fixed by a will, because the will never gets to see the money.
This is a different arrangement again from the two countries on the other side of the Pacific. New Zealand has no nomination at all and everything goes through the estate. Australia sits between the two, with a trustee deciding unless you bind them.
Then the ten year clock starts
What a beneficiary can do with an inherited account was rewritten for deaths from 2020 onwards, and the change was not a small one.
For most people who inherit, the rule is now simple and strict. The IRS states it as: "Empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death."
Ten years. Not a lifetime of small withdrawals stretched over decades, which is what the previous regime allowed. For a traditional account, where every dollar coming out is taxable income, compressing the withdrawals into ten years can push a working-age beneficiary into a higher bracket for a decade.
Unless you are on the short list
Some beneficiaries are treated differently. The IRS calls them eligible designated beneficiaries, and the category covers:
- the "spouse or minor child of the deceased account holder"
- a "disabled or chronically ill individual"
- an "individual who is not more than 10 years younger than the IRA owner or plan participant"
Note the minor child. The concession is for being a minor, not for being a child, so it ends when they grow up rather than lasting.
A surviving spouse has choices nobody else has
Where the account owner died in 2020 or later and before their required beginning date, a surviving spouse may keep the account as an inherited one and "delay beginning distributions until the employee would have turned 72", take distributions over their own life expectancy, or follow the ten year rule. Or they may roll it over into their own IRA and treat it as theirs from then on.
Rolling it over is the option with no equivalent anywhere else in this area. The money stops being an inherited account and becomes the survivor's own, with their own timetable and their own beneficiaries.
Roth accounts are not exempt from all of it
During your lifetime a Roth has no required distributions: "You're not required to take withdrawals from Roth IRAs, or from Designated Roth accounts in a 401(k) or 403(b) plan while the account owner is alive."
That protection is personal to you. The IRS is clear that beneficiaries of those accounts do face distribution requirements after the original owner has died. An inherited Roth is generally still emptied on the ten year timetable, even though the withdrawals themselves are not taxed the way a traditional account's are.
What this guide does not tell you
It does not tell you what your own plan's documents allow, and an employer plan can be more restrictive than the tax rules require.
It does not cover the rules that apply when the account owner had already started taking required distributions, which can add an annual withdrawal requirement on top of the ten year deadline, or the position where the beneficiary is an estate, a charity or a trust rather than a person.
It does not cover state law, spousal consent rules in community property states, or federal estate tax.
And it does not cover what another country does with an inherited American account, which is a live question for anyone whose beneficiaries live in New Zealand or Australia and is not answered by anything on this page.